IBM offshoring: Motives and consequences

Last week, the Australian Services Union said that IBM Australia was looking at sending 800 jobs offshore to low cost centres, a proposition which analysts said was likely driven by a lack of local skills, with customers to face the consequences.

Last week, the Australian Services Union said that IBM Australia was looking at sending 800 jobs offshore to low cost centres, a proposition which analysts said was likely driven by a lack of local skills, with customers to face the consequences.

The union said last Friday that workers had been told that the services for each of IBM's customers, except for the Federal Government, could be potentially sent offshore to low cost centres in India and China. IBM has not confirmed or denied those assertions.

We expect the best value and service delivery from IBM and it is their decision on how to source and apply their global skills to their corporate accounts.

Qantas spokesperson

Most customers when contacted about the possibility were unwilling to comment, including BP, Telstra and the Commonwealth Bank.

Qantas said that it was IBM's decision how it provided the services, as long as the airline received the best value possible.

"There are no stipulations in our arrangements with IBM that require work to be done on or offshore. However, we expect the best value and service delivery from IBM and it is their decision on how to source and apply their global skills to their corporate accounts."

Coca-Cola Amatil said it didn't rely heavily on IBM services and, as such, said the impact would be "negligible".

Westpac had not responded to requests for comment at the time of publication.

Hydrasight research director John Brand believed the local market was having to offshore more senior roles because it was unable to provide a platform for career development of those roles.

"There are some higher-level jobs created for a lot of these contracts and whether the local market is capable of supplying those skills or not is probably the question that really needs to be asked," he said.

"Have we got the right skills development programs here to be able to fill those higher-level roles, the higher value roles?"

Brand didn't believe so.

"I think you need to look at it in balance of the low-cost, low-value offshoring of roles and the market's ability to meet demand for higher-value, higher-complexity roles," he said. He believed positions including senior project managers, business analysts, strategy and architecture roles were much easier for global companies like IBM to offshore.

"Those kinds of roles are still being filled and in many cases — not necessarily in this case for IBM &mdah; but in many cases we do see more roles created in those areas but as I said, the worry is that the local market may not be developing those roles."

He used an analogy of the fashion industry in the 80's. He said the industry was under the impression that if it only offshored low cost labour and maintained the higher-value roles locally, then the industry would thrive. What in fact happened, he said, was all of the expertise ended up going offshore.

"And I think that's what we risk have happening in the IT industry in Australia today, a similar situation where just by the act of offshoring low-cost labour you create somewhat of a self-fulfilling prophecy in that the high-value roles also go offshore," he said.

IBRS analyst Alan Hansell was surprised by the union's claims. "Extending the supplier value chain further involves extra risk to IBM and its customers," he said. "If I was a customer, I would insist on being consulted about the proposed move."

He believed it was "risky" because "the offshore provider in the long term has to cope with the high probability of wages growth, keep staff turnover low and meet IBM's service level requirements". He said customers should insist on service level and data security guarantees.

Hansell was divided on whether IBM was responding to customer cost pressures. "The answer is 'Yes' if responding today to a [request for tender] and 'No' if the long-term managed services contract has been signed," he said. "If IBM, however, has bid low to get a client's business and now realises the pricing regime is unsustainable and proposes to go offshore to get comparable lower cost services, it is embarking on a risky business strategy."

Brand thought it was unlikely customers would have asked directly for IBM to take work offshore to lower prices, but they would have looked for the company to be more "competitive", which would have lead to "internal cost-cutting pressures" within IBM.